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Double taxation of dividends

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September 26, 2012 – Comments (17)

Someone posted, "As a reminder, unless Congress acts before year-end, future dividends will be taxed as ordinary income."

This is not true, no matter how many times this gets said (mostly by Republicans). Without getting into the idiological disputes surrounding this issue, let me say that year end is not some kind of irrevocable deadline for changing this. In fact, for political reasons, Democrats intend to delay making any changes to the tax code until after year end.

I don't know whether or not they will be sucessful with this delaying tactic and I don't know whether the rate on dividends will be allowed to return to former rates or not. But this I do know: The end of the year is not some kind of irrevocable deadline! Changes could be passed after New Years', and made retroactive to the first of the year. In fact, I see this as the most likely scenario, although I have no idea what will happen to the tax on dividends.

Dividends are effectively double taxed, but the whole point of investing is to get a return on money invested, not tax avoidance. As long as the taxes on dividends amount to less than 100% (and they certainly do), dividends will be an important consideration in investing.

As for the double taxation of dividends, there are at least three possible cures:

(1) reduce or eliminate the tax on dividends

(2) reduce or eliminate corporate taxes

(3) Allow corporations to deduct dividends paid as an expense, just like they deduct interest.

I personally favor (3).

17 Comments – Post Your Own

#1) On September 26, 2012 at 12:16 PM, TMFMorgan (< 20) wrote:

Good post. 

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#2) On September 26, 2012 at 12:39 PM, TeamUp (< 20) wrote:

Love it!

 I'm so tired of people acting/talking as if the smart people know how to get out of paying taxes.  This country was made great by those who supported our country, including paying their taxes and investing in our country and our workers.  Sure, we all want to make money, but not at the expense of our fellow citizens. 

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#3) On September 26, 2012 at 1:26 PM, Melaschasm (52.18) wrote:

You make some good points, but start out with a lie.  If nothing is done before 1/1/2012, the dividend tax will be at the ordinary income rate.  The republicans warning about this are telling the truth.

If the Democrats plan to extend that part of the Bush tax cuts, I would guess it will occur after the election, but before the new year begins.  However, I do not expect the Democrats to extend that portion of the Bush tax cuts unless Republicans win big.

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#4) On September 26, 2012 at 1:29 PM, ChrisGraley (29.86) wrote:

i could see the retroactive tax happening because the current administration loves to do things that are unconstitutional.

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#5) On September 26, 2012 at 2:09 PM, Schmacko (57.51) wrote:

"If the Democrats plan to extend that part of the Bush tax cuts, I would guess it will occur after the election, but before the new year begins.  However, I do not expect the Democrats to extend that portion of the Bush tax cuts unless Republicans win big."

This doesn't make sense.  Democrats can't unilaterally pass anything since Republicans control the house.  If Republicans win big in november (gain control of the Senate as well?) then there's even less likely a chance anything will get passed, since Republicans will want to wait for the new year when they'll have less of a need to compromise. 

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#6) On September 26, 2012 at 5:37 PM, edwjm (99.87) wrote:

@Melaschasm:

" You make some good points, but start out with a lie. If nothing is done before 1/1/2012, the dividend tax will be at the ordinary income rate. The republicans warning about this are telling the truth.  ."

You a dead wrong.  It is exactly as I said.  It is the Republicans that are lying.  Do your homework!!! 

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#7) On September 27, 2012 at 3:27 AM, valuemoney (99.99) wrote:

It is wierd. Congress says it wants to fix the debt problem yet we don't want the fiscal cliff to happen that will fix a lot of the budget problems. It raise taxes and cuts spending. Exactly what we need to do but no one wants to do it. Not yet. Lets wait until someone else is in office.... lol....

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#8) On September 27, 2012 at 3:31 AM, valuemoney (99.99) wrote:

I don't like #3. Corp don't need another tax break. I wouldn't mind paying ordinary income on my dividends as long as everyone did.

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#9) On September 27, 2012 at 3:36 AM, valuemoney (99.99) wrote:

That is where ONE of the problems lie. The company should pay the tax they earned the profit. I earn a profit by owning the stock. I should pay regular taxes on them. The company should not pay a dividend if they don't think it is fair. Or the investor shouldn't buy a dividend paying stock if he or she hates it so much. Myself? I will by the stock either way!

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#10) On September 27, 2012 at 3:46 AM, valuemoney (99.99) wrote:

And laugh all the way to the bank. Am I going to try to make less money just because it will get taxed more? NO. I am fine getting taxed more if I make more. I wish I made 5 million a year. Tax me at 50%! Now let say another guy make 10 thousand a year. I sure hope you don't tax him 50% he or she can barely make it as it is. Give him or her the tax break! I sure don't need it if I make 5 million a year. My take home is 2.5 million. I think since he or she is a little less fortuninate I can help out a little more. Come on have a little heart. I will pay my dividends at 50% too and he can pay his taxes if he can even buy some stocks at his lower tax bracket. Let's say 5%.

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#11) On September 27, 2012 at 3:58 AM, valuemoney (99.99) wrote:

Their shouldn't be any tax breaks or deductions for anyone. Just have any earned income and have a accending rate the more money you make. The more money you make the more you are using the stuff the government is spending the money on. Road...etc....plus people who loby the congress men and women get what they want the most! Jeppers this is all common sense. Money will case efficiency too! There will not be any ethenol or stuff like that. What a joke that is. Why do we even do it. Tax breaks allow is to happen. How inefficient. Using corn to make it then corn prices rise and people who need it to EAT have to pay a way higher price so people can drive around in their big SUVs. However the guy how makes the 10 thousand a year has to pay double for his dairy meat etc. Ok I am done ranting. Sorry.

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#12) On September 27, 2012 at 7:10 AM, BMFPitt (74.93) wrote:

Dividends are effectively double taxed, but the whole point of investing is to get a return on money invested, not tax avoidance.

Taxes reduce ROI.  On an investment, that may very well cause the ROI to go negative.

(3) Allow corporations to deduct dividends paid as an expense, just like they deduct interest.

I personally favor (3)

As do I..

There are many absurd claims that things are double taxed when they aren't, but in this case they actually are. Something should be done about it.

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#13) On September 27, 2012 at 10:56 AM, StoneyTerp12 (43.60) wrote:

The preferential treatment on qualified dividends is currently set to expire beginning 12/31/12.  Beginning the 1/1/13, as the code is currently written, all dividends will be taxed as ordinary income.  Internal Revenue Code Section 1(h)(11) for those that want to take a look.

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#14) On September 27, 2012 at 11:17 AM, edwjm (99.87) wrote:

@StoneyTerp12:

The key phrase in your post is, "as the code is currently written."

It can be changed, either before or after 1/1/13.

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#15) On September 27, 2012 at 11:35 AM, Turfscape (37.84) wrote:

>>i could see the retroactive tax happening because the current administration loves to do things that are unconstitutional.>>

As opposed to all the previous administrations, right?

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#16) On September 27, 2012 at 12:40 PM, Melaschasm (52.18) wrote:

#6)  If the Democrats win big, it is more likely that the Republicans will cave in to Obama's tax reforms.  If Republicans win big, it is more likely that Democrats will cave in and extend the Bush tax cuts.

No matter who wins, it is possible that compromise does not happen, and on 1/1/2013 dividends will be taxed as ordinary income.  While it is possible that dividend income will retroactively be taxed as capital gains after a new tax law is passed a few decades from now, I do not expect that to happen.  The republicans are absolutely telling the truth about a big tax increase on dividends occurring on 1/1/2013 if nothing is done.

Because dividends and capital gains from stocks are both investment income, the tax rate should be the same.  Personally I favor using the same rate as ordinary income, but keeping them both at the reduced capital gains rate is the only reform currently being debated. 

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#17) On September 27, 2012 at 12:43 PM, ChrisGraley (29.86) wrote:

no  arguments from me there turfscape, but it seems its got progressively worse. 

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